The funder is not being generous. The funder is being rational. Settlement for less than the full balance is a business decision driven by the funder’s calculation of expected recovery, cost of enforcement, and risk of an adverse legal outcome.
Business owners in MCA disputes often assume the funder holds all the leverage and will never accept less than the full amount. This assumption misunderstands the funder’s position. The funder is not a moralistic actor seeking full repayment as a matter of principle. The funder is a financial institution seeking to maximize net recovery on a receivable. When accepting a reduced amount today produces a higher net recovery than pursuing the full amount through enforcement, the funder accepts the reduced amount. That is not concession. It is optimization.
The Cost of Enforcement
Pursuing the full balance requires legal action. Legal action costs money. Attorney fees for MCA litigation range from thousands to tens of thousands of dollars depending on the complexity and duration of the case. If the case goes to trial or arbitration, the costs increase further. If the case is in the borrower’s home state rather than the funder’s preferred forum, travel and local counsel costs add up.
Every dollar spent on enforcement is a dollar subtracted from the recovery. A funder that spends $25,000 in legal fees to collect $75,000 has a net recovery of $50,000. A settlement of $55,000 today, with no legal fees, produces a higher net recovery. The math favors settlement.
The Risk of an Adverse Outcome
Litigation is uncertain. If the borrower raises a credible usury defense and the court recharacterizes the MCA as a loan, the funder may recover nothing — the agreement is void and the funder forfeits the entire obligation. If the borrower raises a consumer fraud claim with treble damages, the funder may end up owing money to the borrower rather than collecting from the borrower.
The funder’s internal risk assessment weighs the probability of these outcomes against the cost of settlement. A 30% chance of a zero-recovery outcome makes a 40-cent settlement very attractive. A 50% chance of a treble-damages counterclaim makes any settlement that avoids the counterclaim attractive. The funder does not need to believe the borrower will win. The funder needs to believe the borrower might win. Uncertainty is the borrower’s leverage.
The Time Value of Money
Litigation takes time. A contested MCA case may take six months to two years to resolve through litigation or arbitration. During that time, the receivable is aging on the funder’s books. The funder has capital tied up in the dispute that could be deployed elsewhere. The present value of $60,000 received today is higher than the present value of $100,000 received in eighteen months, especially when the $100,000 is uncertain and subject to legal fees. Funders, like all financial institutions, prefer certain cash today over uncertain cash tomorrow.